StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Analyzing the Important Micro-Economic Concepts - Coursework Example

Summary
"Analyzing the Important Micro-Economic Concepts" paper takes a look at the concept of cross-price elasticity of demand. This concept of elasticity measures the degree of responsiveness of demand for a good as a result of a change in the price of another but related good…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER94.2% of users find it useful
Analyzing the Important Micro-Economic Concepts
Read Text Preview

Extract of sample "Analyzing the Important Micro-Economic Concepts"

Topic:  Microeconomics Table of Contents 2 Introduction 3 Cross price elasti in the U.S.A goods 4 Ronald Coase Theorem 7 Reference 9 Abstract This report aims at analyzing two very important micro-economic concepts. First it takes a look at the concept of cross price elasticity of demand. This concept of elasticity measures the degree of responsive of demand for a good as a result of a change in the price of another but related good. Elasticity of demand is analyzed with respect to the US goods market. For the ease of understanding typical goods of consumption are divided into eleven broad groups and thereby the analysis is carried out. The second part of the report provides an overview of the work of Ronald Coase for which he got the Nobel Prize. The property rights and transaction cost theory holds when parties bargain over the ambiguities associated with properties. Introduction Microeconomics is a crucial branch of economics. It deals with the functioning of the individual units of decision making of an economy like the households, firms and the Government. Cross price elasticity is important from the point of view of economic decision making. Right from policy makers to producers, every individual economic player needs to be aware this concept of elasticity in order to make sound decisions. Demand and supply forces comprise the veins of any economy. Under such circumstances cross price elasticity concept gives a vivid idea of how quantity demanded for a commodity changes as a result of changes in the price of another commodity. Thus producers have to keep a watch on the demand and prices of other goods as well before setting any production plan. The very famous Ronald Coase, the British economist got the Nobel Prize for his work on property rights. He showed how with changes in property ownership or in presence of externality the distribution of wealth is affected. Cross price elasticity in the U.S.A goods Elasticity is a concept that measures the sensitivity of demand for a good or a service in response to a change in its own price or change in the income of the consumer or a change in the price of a related good or service. Cross price elasticity in particular measures the sensitivity of demand for a commodity with respect to the prices of other commodities. For example the demand for tea changes as a result of a change in the price of sugar because tea and sugar complementary goods. The demand for tea also changes as result of change in the price of coffee. However in both cases the change is different. While tea and sugar are complementary, tea and coffee are supplementary. Therefore, a change in the price of sugar directly affects the demand for tea while a change in the price of coffee inversely affects the demand for tea. Mathematically cross price elasticity of demand is the ratio of the percentage change in demand for a commodity X and percentage change in the price of a related commodity Y. It is expressed as, e = Percentage change in quantity demanded for X Percentage change in price of Y The sign of this ratio depends on the relationship between the two commodities, X and Y. If X and Y are complementary in nature then a rise in the price of Y will result in a fall in the quantity demanded for X and thus cross price elasticity of demand for X will be negative or the ratio less than zero. If X and Y are substitutes, then a rise in the price of y will result in a rise in the demand for X and thus cross price elasticity of demand will be positive or the ratio will be more than zero. (How Elasticity of Demand Affects Total Revenue, n.d.) The concept of cross price elasticity remains quite the same irrespective of the economy in consideration. To analyze cross price elasticity of demand in the U.S.A. goods and services, the entire market can be divided into eleven broad aggregate commodity groups. The eleven categories of commodities are, 1. Food, 2. Alcohol and tobacco 3. Clothing 4. Housing 5. Utilities 6. Transportation 7. Medical Care 8. Durable goods 9. Other non-durable goods 10. Other services and 11. Other miscellaneous goods All items of consumption have been divided into eleven groups. Any change in the price of a commodity affects the quantity demanded for a related commodity within a group. It is crucial to note that the different groups are mutually exclusive and unrelated. As such elasticity of demand cannot be calculated between commodities from two different groups. Or in other words elasticity of demand can only be obtained between commodities of the same group. For example a durable good like utensil is in no way related to a food and perishable item like meat and thus two are unrelated. A rise or fall in the price of utensils will no way affect the quantity demanded for meat. Once again even within groups there can be unrelated goods. For example in the clothing group change in the price of footwear will not affect the demand for jewelry or garments. In such cases the ratio between the percentage change in price of one good and the percentage change in the demand for another unrelated good will be equal to zero. However in the transportation group rise in the fare of one mode of transportation will certainly lead a rise in the demand for an alternative mode of transport. It is also important to note in this respect that cross price elasticity of demand is not reciprocal. It is important to calculate the cross price elasticity of demand both ways. (Blanciforti L., Green R.D., and King G.A., August 1986) Ronald Coase Theorem The British economist Ronal Coase is well known for his work in property rights. In the year 1991 he also received the prestigious Nobel Prize for his theory of property rights. Through this theory he divulged the significance of property rights for the institutional structure a functioning of an economy. The Coase theorem of property rights focuses on the transaction costs involved in disputes in neighbouring properties. It addresses the negative externalities like factory smokestack or cattle destroying a nearby farmer’s crops. Under such circumstances, Coase states that taking transaction cost as zero, the economic outcome including the distribution of wealth would be the same. However Coase also made it a point mention that transaction costs are seldom. In reality transaction costs can be so high that it become difficult for negotiations and contracts to take place. Thus through property rights and transaction cost theorem, Ronald Coase tried to assess and refine the orthodox economic models. These earlier models assumed that transaction costs are zero and that economic activity takes place in vacuum. That is to say economic activity can take place even without space, time or any energy inputs for production. If transaction costs were zero even in case negative externality the distribution of wealth would be unaffected. If a person needs to compensate a farmer for crops destroyed by his wandering cattle, the amount the rancher would pay for leasing the land would be lower by that same amount, while the farmers lease would then be higher by that amount. He also points out that even in cases when there is a change in the liability law, the distribution of wealth remains unchanged. Coase’s findings are well applicable to cases where there are changes in the basic property rights like rights to ownership of land. In case the law were twisted so as to support some version of land reform or land rent reform, such as Georgist views of rights to land rent then the distribution of wealth would no more be equal even if there were zero transaction costs. (Mike OMara, May 1999) Reference Blanciforti L., Green R.D., and King G.A., (August 1986), U.S. Consumer Behavior Over the Postwar Period: An Almost Ideal Demand System Analysis, retrieved December 3, 2008, from http://giannini.ucop.edu/Monographs/40-Postwar.pdf Mike OMara, (May 1999), Coases Theorum, retrieved December 3, 2008, from http://www.cooperativeindividualism.org/coase_landtheory.html Read More

CHECK THESE SAMPLES OF Analyzing the Important Micro-Economic Concepts

Financial Issues in BP Pipeline

This will be achieved through analyzing concepts related to micro and macroeconomics on the various events.... Opportunity cost is one of the most used concepts in economics.... Assessing the opportunity cost of any event is important in establishing the real cost of any action.... It will also involve analyzing them and establishing causal connections as well as making comparisons....
5 Pages (1250 words) Essay

Micro & Macro Economic Analysis - Electronic Arts

The report has been divided into two major sections, analyzing the impacts produced on Micro and Macro economy of a company and its market.... In Economics, the relationship between a prospective seller and buyer of a product is known as demand and supply.... The price of a product is directly proportional to its demand....
8 Pages (2000 words) Coursework

Understanding the Concept and Process of Marketing - Segmentation, Targeting, Positioning

In addition to that, the paper will provide an overview of the principal practices and concepts of marketing.... here are two principal marketing concepts.... Benefits and Costs of Adopting the Above marketing concepts ... From the paper "Understanding the Concept and Process of Marketing - Segmentation, Targeting, Positioning", Cornflower Blue specializes in the production and distribution of products such as body care products that are herbal-oriented, herbal remedies, aromatherapy products, and culinary products....
7 Pages (1750 words) Assignment

Macro & Micro Economics Issues

The AD-AS model also incorporates the notion of microeconomic concepts like demand and supply framework including equilibrium analysis (Karl, E.... And stressing upon this assumption coupled with the evidence of the behavior of the agents (the domain of social interaction), economics has been able to develop various stylized theoretical models for analyzing those interacting patterns and generating optimal solutions for the attainment of the general welfare of the people....
9 Pages (2250 words) Essay

Quantitative and Academic skills in learning Economics

The subject centers at studying the theory of needs and wants and aims at analyzing the way in which a compromise with respect to the scarce resources is taken in different societies.... conomics is one of the few subjective areas that incorporate a huge amount of quantitative methods in order to explicate its concepts.... raphical representation of situations is one of the most common tools that is being extensively utilized in various concepts of micro as well as macro economics....
5 Pages (1250 words) Assignment

Media Economics and Technological Revolution

The cultural industries played an important role in offering the main fundamentals for investigating and analyzing the economics of media.... From the paper "Media Economics and Technological Revolution" it is clear that cultural industry can be defined as that industry that incorporates different types of medium including television, music, print media along with art and architecture....
8 Pages (2000 words) Coursework

Analysis of Market Situation and External Environment

This paper illustrates that among microeconomic theory, one of the most important concepts is supply and demand analysis that is related to analyzing the supply and demand graph to measure the shift of the graph.... It is necessary to explain these concepts before describing their importance for businesses.... upply and demand have a close relationship with concepts of equilibrium and elasticity.... Both are important in helping businesses make important decisions and understand their internal and external environment in a better way....
8 Pages (2000 words) Essay

Construction Economics: Barratt Development Public Limited Company

Housing prices depend on factors such as economic growth, rate of interest, employment, consumer confidence, and important aspect of supply and demand.... This research paper "Construction Economics: Barratt Development Public Limited Company" intends to plan for the next two years when the company needs to analyze the situation best suited....
6 Pages (1500 words) Research Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us